Apple 'More Compelling' Than IBM, Citi Says

In a report published Tuesday, Citi analysts maintained a Neutral rating on International Business Machines Corp IBM, with a price target of $170, after the company reported above-expectations EPS.

IBM reported sales of f$19.6b, marginally short of the consensus figure of $19.7b. However, its EPS, at $2.91, was above consensus of $2.82. The company's results were not as bad as was feared, especially in view of adverse current effects, the mix "was not what we hoped for," the analysts said.

"We note most of the upside was driven by Hardware primarily due to the mainframe System Z refresh which we expected but we also would have liked to see stronger results from services and software. After hours the stock traded relatively flat after the initial increase on stronger EPS followed by softer service signings," the analysts added.

In the report Citi noted the positives for IBM as:

• EPS beat of $0.09, or 3 percent
• Reiteration of full year guidance of operating EPS of $15.75-$16.50, free cash flow of flat y/y and higher margins y/y, in-line with consensus
• Flat y/y services backlog
• More than 30 percent y/y growth in IBM Hardware, driven by mainframe System Z sales

The negatives were noted as:

• FX impact on revenues by -8 percent y/y and currency is "likely to remain a significant headwind for the rest of the year," the analysts wrote.
• Signings were up merely 5 percent y/y to $10.7 billion, short of the consensus figure of $12.7 billion. This marks "the lowest level in four years despite an easy comp"
• Free cash flow adjusted for financing of $1.1 billion, short of the consensus of $1.7 billion
• Services revenues declined with GBS down 4 percent y/y and GTS down 1 percent y/y and Software down 2 percent y/y

The EPS estimates for FY15, FY16 and FY17 were reduced from $15.79 to $15.78, from $16.49 to $16.27 and from $17.60 to $17.21, respectively.

"We see more compelling investment opportunity in Apple Inc AAPL (rated Buy) who reports next week," the report added.